COMMITTEE OF EUROPEAN SECURITIES REGULATORS

CESR, 11-13 avenue de Friedland, 75008 Paris, France - Tel +33 (0)1 58 36 43 21, web site : www.cesr.eu

Date: 3 July 2009

Ref.: CESR/09-681

CALL FOR EVIDENCE

Fact finding exercise of the use

in the European Union of

ratings issued by third

countries CRAs

Deadline for contributions: CESR invites responses to this call for

evidence by 17 August 2009. All contributions should be submitted

online via CESR’s website under the heading ‘Consultations’ at

www.cesr.eu. All contributions received will be published following the

close of the consultation period, unless the respondent requests their

submission to be confidential.

2

Background

The EU Parliament and the Council have recently approved the Regulation on Credit Rating Agencies

(CRAs)1. Although the text still needs to be formally adopted and is subject to jurist-linguistic revision,

translation and publication in the Official Journal of the European Union, the substance should remain

not change.

Publication of the Regulation is aimed to take place by the end of September 2009 and its entry into

force would be 20 days later (i.e. mid-October).

European Commission request to CESR for technical advice

In the context of the Regulation, CESR has been mandated by the European Commission to provide it

with advice on the equivalence of the regulatory (legal and supervisory) frameworks applied by certain

third countries to the activities of credit rating agencies to the regulatory framework for credit rating

agencies introduced in the Community by the CRA Regulation.

The mandate (included as annex) consists of two parts:

(i) technical assistance for the assessment of the regulatory frameworks of Canada, Japan and the

United States of America; and

(ii) a fact finding exercise to establish whether other additional jurisdictions should be assessed.

Regime for CRAs based in third countries (non-EU jurisdictions)

In order to allow EU financial entities (e.g. banks, investment firms, UCITs) to use ratings issued by

non-EU CRAs, the Regulation sets forth two distinct mechanisms:

Endorsement (envisaged for CRAs of systemic importance): Under this procedure, a CRA established in

the EU may endorse ratings issued by a foreign CRA belonging to the same group or ratings issued by a

foreign CRA in the circumstances where the EU CRA itself has undertaken partly or entirely the rating

activities leading to the issuance of the endorsed rating. Endorsement is only possible if certain

conditions are met (e.g. the foreign CRA is subject to registration and supervision in the third country;

the foreign CRA fulfils requirements as stringent as those of the Regulation; the EU home competent

authority is able to monitor compliance with requirements, etc.).

Certification (envisaged for CRAs without systemic importance): Under this procedure there are two

cumulative requirements:

- The European Commission must have decided that the third country’s legal and supervisory

framework is equivalent to that established by the EU Regulation; and

- A college of competent authorities must certify that the foreign CRA fulfils certain requirements. To

this effect the applicant must demonstrate to the college that it meets those criteria (i.e. the CRA is

subject to registration and supervision in the third country concerned; cooperation arrangements

between the relevant Competent Authorities are in place).

Certification mechanism

The mandate CESR has received from the European Commission focuses on the certification regime. As

outlined above, a positive equivalence determination would allow qualifying CRAs to apply for

certification, which, if granted by the EU competent authorities, would enable those CRAs to seek

exemptions from specific organisational requirements set out in the Regulation including that of 1http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P6-TA-2009-0279+0+DOC+XML+V0//EN&language=EN

3

maintaining a physical presence in the EU. Any such exemptions would be granted by the EU

competent authorities on a case-by-case basis.

Once a foreign CRA has achieved certification, EU financial entities will be able to use for regulatory

purposes the credit ratings issued by that CRA relating to entities established or financial instruments

issued in third countries. However, the EU Regulation does not allow EU financial entities to use other

types of ratings issued by such CRAs for regulatory purposes (e.g.. ratings related to entities

established or financial instruments issued in the EU).

Fact finding exercise on the use in the EU of ratings issued by CRAs established in third

countries which relate to the creditworthiness of entities established in third countries

and/or financial instruments issued in third countries.

After a twelve month transition period envisaged in Art. 36 of the Regulation, EU financial entities will

no longer be able to use ratings issued by third country CRAs for regulatory purposes unless such CRAs

have been subjected to the certification route (or the endorsement system).

As discussed above, a positive equivalence decision is a precondition for certification of not systemically

important CRAs based in third countries. Therefore, it is important that CESR starts working on the

equivalence assessment of those third countries which produce a significant number of ratings used in

the EU.

At this stage the European Commission has prioritised work on three countries: Canada, Japan and the

United States of America.

CESR seeks input from market participants on the use in the EU of credit ratings issued by third

country CRAs of non systemic importance to the EU which relate to the creditworthiness of entities

established in third countries and/or financial instruments issued in third countries.

The objective of this fact finding exercise is twofold:

- to gather information about how many non systemic CRAs based in Canada, Japan and the US

might be interested in applying for certification in the EU; and

- to determine whether there is a need to examine the equivalence of the regulatory and supervisory

regimes of any other third countries. To this end, CESR would like to obtain information on how

many non systemic CRAs based in other third countries might be interested in applying for

certification in the EU.

Call for evidence

CESR invites all interested stakeholders, in particular third country regulators and CRAs as well as

European users of ratings including their associations, to submit their views on which issues CESR

should consider in its response to the fact finding request from the European Commission. In particular,

CESR is interested in obtaining information on the following:

- Third country CRAs planning to apply for External Credit Assessment Institution recognition under

Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions; and

- The use by EU financial entities and other relevant market participants of ratings issued by those

third country CRAs.

All contributions should be submitted online via CESR’s website under the heading ‘Consultations’ at

www.cesr.eu by 17 August 2009. All contributions received will be published following the close of the

consultation period, unless the respondent requests their submission to be confidential.

4

CESR’s next steps in relation to its work on third countries

CESR’s expected timetable in relation to the European Commission mandate is as follows:

- Fact finding exercise: after reviewing the answers to this call for evidence and consultation with

CEBS, CESR would submit its conclusions to the European Commission in the last quarter of 2009.

- Technical advice on the equivalence of the Canadian, Japanese and US legal and supervisory

frameworks: after consultation with the foreign authorities concerned, CESR will publish a

consultation paper around the end of this year.

Finally, CESR would like to inform market participants that it has already commenced discussions

with relevant third country authorities to set up the co-operation arrangements required by the

Regulation for both the endorsement and the certification regimes. According to the Regulation such

arrangements shall specify at least:

(i) the mechanism for the exchange of information between the competent authorities

concerned; and

(ii) the procedures in place concerning their cooperation on supervisory activities.

It is CESR’s intention to finalise these co-operation arrangements in the first quarter of 2010.

5

Annex

6

7

8

9

10

11

12

13

14

15